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LOS k: Describe the mechanisms available for placing bonds in the primary market and differentiate the primary and secondary markets in bonds.

Which of the following does NOT represent a secondary market offering? When bonds are sold:

A)	in a Rule 144A offering.

B)	on an exchange.

C)	in an over-the-counter dealer market.

When bonds are sold in a Rule 144A offering, they are sold privately to a small number of investors or institutions. This offering does not require registration with the SEC and this is valuable to the issuer. The investor will require a slightly higher yield because the bonds cannot be resold to the public unless they are registered with the SEC. The other sales transactions in the responses represent secondary market offerings.

When bonds are sold in a bought deal, the transaction takes place on the primary markets. In a bought deal, the investment banker buys the issue of bonds from the issuer and then resells them (i.e. they have underwritten the offer and the arrangement is termed a firm commitment). Bonds are sold in secondary markets after being sold the first time (after they have been issued in the primary market). The term over-the-counter does not apply.

Which of the following does NOT represent a primary market offering? When bonds are sold:

A)	on a best-efforts basis.

B)	from a dealer’s inventory.

C)	in a private placement.

When bonds are sold from a dealer’s inventory, the bonds have already been sold once and the transaction takes place on the secondary market. The other transactions in the responses take place in the primary market. When bonds are sold on a best-efforts basis, the investment banker does not take ownership of the securities and agrees to sell all she can. In a private placement, the bonds are sold privately to a small number of investors.

Anthony Schmidt, CFA, makes the following statements while discussing issuance of new debt:

Statement 1:	A best-efforts offering, which is a form of a negotiated offering, occurs when an investment banker purchases an entire issue to resell.
Statement 2:	Registration with the SEC can be avoided with a private placement, but a higher yield will be required to compensate for the limited liquidity.

A)	Both of these statements are accurate.

B)	Neither of these statements is accurate.

C)	Only one of these statements is accurate.

Statement 1 is incorrect. A firm commitment (not a best-efforts offering) is an arrangement where the investment banker purchases the entire issue and resells it.

Statement 2 is accurate. Under a private placement, a firm can avoid registration with the SEC, but the buyer will require a higher yield to compensate for the illiquidity of the issue.